The global COVID-19 pandemic has
created an associated economic crisis as many businesses have been forced to
close because of lack of demand (travel, for example) or social distancing (too
many to list). With predictions of a possible 32%
unemployment rate
in the United States, how does the response to the economic crisis here compare
with those of other countries?
Both the United States and our
major European allies have passed economic stimulus laws that exceed 10% of
gross domestic product. The $2.2 trillion CARES Act package signed
March 27 was 10.1% of 2019 GDP of $21.7
trillion. Spain passed an even larger package, equaling 20% of its GDP.
We can think of the CARES Act as
having three main components. First, there are individual safety-net supports,
including the $1,200 payments most individual adults will received, more money
into the SNAP (formerly named Food Stamp) program, and greatly expanded
unemployment insurance. Second, there are $350 billion in forgivable loans for
small business, which become grants if the companies don’t lay off their
employees (the “Paycheck Protection Plan”). Third, there is a $500 billion
bailout fund for large companies. This is poorly designed, most importantly
because it doesn’t require companies to maintain staff. Over 20 million people have filed
for unemployment benefits in the last four weeks alone.
Besides the catastrophic loss of
wages, the biggest problem with allowing bailed-out companies to lay off staff
is that such a large percentage of the U.S. workforce gets its health insurance
through work, meaning that when they lose their jobs, they also lose their
health insurance. As Saez and Zucman point out, people
can continue their employer’s insurance under COBRA, but it is extremely
expensive since there is no employer contribution. This comes precisely at a
time when they may really need it, given the length and ruinous expense of
treatment incurred for people with severe cases of COVID-19.
By contrast, in all western
European countries (as well as Canada, Japan, South Korea, Taiwan, etc.) health
insurance is universal. Even in a country with a public/private system like
Germany, when you lose your insurance due to job loss, you transition
seamlessly to a public health insurance plan with no loss of coverage.
European responses have focused
much more on a wage-support approach like the small business program in the
United States, except applied economy-wide. The U.K. government has been
described as the “payer of last resort,” as it stands to guarantee 80% of workers’ wages
indefinitely. For both employees and the self-employed, this would be capped at
£ 2,500 (approximately $3,125) per month. Given that the United Kingdom has the
National Health Service, a true socialized medicine system completely divorced
from employment status, layoffs were never going to mean a loss of health care
access for workers in Great Britain and Northern Ireland. But by guaranteeing
employment, the United Kingdom will have higher levels of job security than
U.S. workers will, with jobs to go back to when the crisis ends. Indeed, the
problem in the United States is not simply health insurance, but the fact that
each of the 50 states has different
rules
for unemployment insurance, with inter-state variation both in the generosity and
length of payments in the different programs.
An important difference between
wage support in Europe and for small business in the United States is that the
European plans are open-ended, whereas the U.S. plan must be renewed with
Congressional legislation every time it runs out of money. This opens the
possibility of deadlocks if attempts are made to attach unrelated provisions to
an extension bill, something that happens frequently in Congress. And this is
no longer a prediction, because the $350 billion ran out on April
16.
Absent federal leadership, we also expect
“the economic war among the states” to resume, with each state offering
subsidies trying to attract investment, in some cases through job piracy. From
our experience during the Great Recession (when there were far more desperate
politicians chasing far fewer deals), we can expect to see another surge in expensive
megadeals.
Facing high unemployment and
relatively few opportunities to attract large numbers of jobs, states will bid
more for those opportunities than they would in more prosperous times. States
will be tempted to engage in job piracy in many multi-state metropolitan areas,
such as New York,
Charlotte, and Memphis.
We need to remind states about the
first-ever binding anti-piracy agreement, the 2019 accord between Kansas and
Missouri, where research by the Hall Family Foundation had documented that the
two states wasted $335 million over 10
years
moving companies short distances but across the state line within Greater
Kansas City.
It is imperative that we support
the anti-piracy legislation pending in 13 states this year,
sponsored by Chicago-based Progressive Public Affairs, which has amassed lead
sponsors from both parties (nine states have Democratic sponsors, while four
have Republican sponsors). And we will need to keep the pressure on states to
ensure that companies which receive government support fulfill their job and
other commitments.
Given the predominance of wage
support in European countries, most of this funding will not be subject to EU
subsidy (“state aid”) rules. That’s because the money will be available
economy-wide in the Member States, not favoring one company over another. In
technical terms, this use of the funds is “non-selective,” and therefore not
state aid at all, as our contacts at the European Commission have explained. Nevertheless,
due to the large amounts of money at stake, each Member State will be
responsible to ensure that recipients maintain employment in order to qualify
for government paying their wage bills.
Some EU spending will qualify as
state aid, such as the Danish’s
government’s plan
to partially compensate organizers of conferences and other events that were
canceled due to the coronavirus pandemic. That is, it is selective, for being
available to one industry. To spell out such distinctions, the European
Commission published on March 19th its “Temporary Framework” notifying Member
States about likely scenarios and whether or not it was likely to approve
subsidies the Member States might propose. (Note that the Commission has
exclusive power to approve, modify, or deny proposed state aid projects or
programs by the 27 Member States, subject to court review.) As I have shown
previously,
the European Union has shown itself much better than the United States at
controlling economic development subsidies.
As we can see, there are major
drawbacks to the U.S. response to the economic crisis. By letting people become
unemployed rather than making an open-ended wage guarantee, workers lose their
health insurance and have no assurance of a job to go back to when the health
crisis ends. High unemployment will also pressure state and local governments
to return to worst practices in economic development. There is still time to
change course, but it will take constant and high levels of political pressure
to make it happen.
Cross-posted with Good Jobs First.
